Govt publishes small DC scheme consolidation consultation

The government has published a defined contribution (DC) pension scheme consolidation consultation that proposes for smaller schemes to be expected to initiate wind up and consolidate if they do not offer sufficient value to members.

Under the proposals, trustees of DC schemes with assets below £100m would be required to assess and report on how their scheme presents value for members, taking into account costs and charges, investment returns and various elements of governance and administration.

Smaller schemes that do not present value for members will also be required to report this outcome in their scheme return.

The proposals would require all relevant schemes to report on the return on investments of default and member selected funds, as well as reporting to the regulator the total amount of assets held in the scheme in the annual scheme return.

The changes outlined in the consultation are designed to improve DC pension scheme governance, promote the diversification of investment portfolios and signal the Department for Work and Pensions' (DWP) commitment to transparent disclosure to scheme members.

Commenting on the proposals, Pensions Minister Guy Opperman, stated: "The UK has a world-class occupational pension system and the market is continuing to consolidate and to innovate in the interests of scheme members.

“But there remain large numbers of smaller DC schemes, many of which are poorly governed, have on average higher charges and do not have the scale to bring the benefits of investing across a broad range of asset classes.

“I am determined to do more to ensure the trustees of smaller schemes act in the best interests of their members.

“I am therefore bringing forward measures that will ensure that we tackle persistent underperformance and poor governance by accelerating the pace with which the market is consolidating.

“This will bring the benefits of scale to all scheme members including a greater capacity to take advantage of illiquid and other alternative investment classes.”

Announced as part of the government's response to the February 2019 consultation Investment Innovation and Future Consolidation, the consultation also seeks views on changes to legislation and new statutory guidance to extend access to a more diverse range of asset classes.

The government response has highlighted feedback from the February 2019 consultation on the role the measurement of performance fees and the charge cap might play in limiting the ability of schemes used for automatic enrolment default funds to access less liquid investment classes, such as venture capital.

Considering this, the government is now consulting on a proposed amendment to the 0.75 per cent charge cap to better enable schemes to pay performance fees and exclude the costs of holding 'physical assets'.

It proposed legislative change to the way compliance with the charge cap is measured for performance fees to give trustees greater flexibility in investment decisions and is seeking views on plans to further extend this flexibility with an alternative approach to measurement.

In particular, it suggested an update to the charge cap guidance to clarify treatment of underlying costs in investment trusts.

LCP DC practice principal, Stephen Budge, commented: “We welcome the government's relaxation of charge cap rules to allow for such things as performance fees which should free up further interest and support for illiquid assets.

"It’s also interesting to see the greater clarity and support to hold physical assets outside of the charge cap restrictions, clearly highlighting the intent to allow infrastructure focused investments. The charge cap relaxations and clarities offered are going to help significantly with enhancing investment strategy design."

Opperman added: "Trustees’ fiduciary duties require them to take account of all long-term financially material considerations when deciding their investment policy.

“It remains government policy not to direct the trustees of private trusts to invest in a particular way.

“As part of that, it is also government’s policy to ensure it is not putting up unnecessary or inadvertent obstacles to trustee decisions where these would limit trustees’ ability to take full advantage of the broad range of asset classes available to them.

“I am aspirational about ensuring schemes are able to invest in a broad range of assets such as technological, social and environmental infrastructure, and welcome the continued growth of investment in these assets by pension schemes.

“The government could not be clearer in its support for pension funds investing in such products as part of a balanced portfolio. We thank all those who contributed to the consultation, and who have shaped the debate on these issues.

“These measures, together with the recent amendment to the Financial Conduct Authority’s rules on permitted link funds, seek to address any unjustified potential regulatory barriers to investment in some less liquid assets."

Other key proposals outlined within the consultation include an amendment to The Occupational Pension Schemes (Investment) Regulations 2005 to extend the requirement to produce a default Statement of Investment Principles (SIPs) to ‘with profits’ schemes, and an amendment to the Investment Regulations 2005 to exclude wholly insured schemes from some requirements of the SIPs.

It has also proposed amendments to the statutory guidance in order to provide additional clarity on how costs and charges information should be set out.

The DWP has proposed that all of the amendments within the consultation to be brought into force on 5 October 2021.

Responding to the consultation announcement, The Pensions Regulator executive director of regulatory policy, analysis and advice, David Fairs, said: “The proposals call on schemes with assets under £100m to carry out a more rigorous annual assessment of their value for members. If those schemes cannot demonstrate they offer good value, they will have to tell us whether they plan to improve or consolidate.

“This is in line with our aim to cut the number of poorly run schemes in the market so every saver benefits from being in a pension scheme with excellent standards of governance and which delivers good value.”

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